Let’s Generate Cash!

For the 73rd straight year, our savings account is earning an interest rate of zero. Okay, it isn’t exactly 73 years and it some miniscule amount above zero, but you know what I mean.

Over the last few weeks I’ve been talking a good friend of mine who is a little older than me… kind of like a big sister. We think alike on many things. In some ways it is almost like talking to myself, but a “me” with ten years of more life experience.

Lately, she’s focusing on investments on generate cash. It never occurred to me to ask why, because it just seems like a smart idea in general. As you move from your 20s to 30s and 40s, you have more responsibility (i.e. children) and it makes sense to have some investments that generate income. It can be used to supplement your salary now or to help phase out your job in the future.

If you take a minute to think about it, if you could generate $50,000 in cash from investments, you could probably retire, right? OF course your answer depends on how much you spend, assumes no inflation and a bunch of other messy details. Nonetheless, you get the idea.

So in this world of (close-to) zero interest rates, how do you generate cash? Here’s what I came up with:

Dividend Paying Stocks

Sometimes I forget that people once bought stocks to generate cash. Companies would pay out profits to shareholders and shareholders could use that money, to well buy stuff they need. It was a good little system. I speak of it in the past tense because many companies stopped paying dividends and instead kept the money to grow profits.

Personally, I think this is where investing with Motif can save you money. You could create a portfolio of up to 30 high-dividend stocks for one commission of $10. They’ll even give you up to $150 to get started.

You can also just buy the SPDR S&P Dividend ETF (Ticker:SDY) or Vanguard’s Dividend Appreciation ETF (Ticker: VIG) if you don’t want to spend the time researching companies. (Though the blogs that I mention above have done a lot of the hard work for you.)

Real Estate Investment Trusts (REITS)

This is really a special case of the dividend stocks above. REITS are traded as stocks and have to pay 90% of its taxable income as dividends to shareholders. The end result is that you can earn 4-7% in dividends. However, like a stock, their value can go up and down.

Lately my “big sis” has been loving these as part of her cash generating plan. I like to think that I talked her into them, but she does so much research it isn’t likely my mention played a significant role.

Bonds

I hope you find this a refreshing breath of honesty… I don’t know much about bonds. I won’t act like I do. I would just rely on Vanguard’s Total Bond Market ETF (Ticker: BND).

P2P Loans

Over the last 5 years, I’ve invested in 550 loans in Lending Club. My return is 7.01%. According to Lending Club statistics I’m doing below average as 8.5% is the norm.

What’s great about how Lending Club generates cash is that money is consistently being paid to you. I like to reinvest it into new loans, but I could easily just take the cash.

Some people are nervous about P2P Loans, but they’ve proven to me that they’ve got staying power. I think that as long as you don’t too carried away with it, Lending Club can play a good role in your cash generating portfolio.

CD Ladders

It’s good to have some money in safer investments. That’s why I would consider laddering some CDs to generate cash too. They aren’t generating great returns, but it’s the closest thing to a guaranteed return here.

Summing it all Up

I said it before, but I think if there’s a lot of value in creating a dividend Motif around the first three asset classes. Perhaps it could be 25% VIG, 25% VNQ (Vanguard’s REIT ETF), and 25% BND… and 25% some of the companies from the other blogs I mentioned. Yes, those stocks might be duplicates of what’s in VIG, but “big sis” says she likes to find some values and focus on a few companies that she likes.

Round out that portfolio with P2P investing and some CDs and you should have a fairly reliable stream of cash coming in.

Let’s pretend that I have a million dollars. I would put $700,000 if the Motif, $100,000 in CDs, and $200,000 in Lending Club. I am somewhat confident in that generating 4% in cash over time. That would be $40,000, which isn’t bad for a passive income to live on.

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Comments

We started investing with bonds for the interest and moved on to stocks, MLPs, and Reits, all for the income they generate. Every stock we own, but one, pay a dividend. In fact, we didn’t buy Apple stock until it started paying a dividend. It has worked out well for us as this year our investment income has surpassed the amount we get from pension and social security. We have strict criteria for the company’s financial strength and safety rating, as well as their history of uninterrupted dividend payment, so I feel very safe with our selections.

I like income generating assets because I don’t have to think about dipping into principal if I need that income. And why would I need that income, you say? Well, I use it to some extent for “rebalancing” purposes. It’s just additional ammunition for rechanneling funds into assets I decide I want to buy into at some point in the future, without triggering transaction costs. I also like the concept of buying assets where dividends grow over time, and all that generating more and more cash over time. Of course, it’s best to put the income generating assets in your retirement accounts, so as to avoid or defer taxes on the income.

You also mentioned quite a good number of income sources. I’d say each may serve a different purpose in your portfolio (beyond just the generation of income). I use bonds because they are not as well correlated to equities and so they’re in my portfolio to dampen volatility and lower risk.

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